When you apply for a mortgage, your lender will want to know what your down payment will be relative to the value of the home you are financing. This is called the loan-to-value ratio (LTV). If, for example, you are purchasing a home for $100,000 and borrowing $90,000, your LTV is $90,000/ $100,000, or 90%. You’re “committing” 10% of your own money.
The value of the property calculated in the LTV ratio will always be the lower of the appraised value or the contract price, as your lender will only lend against the lower of the two.
With FHA and VA mortgages, the LTV ratio can go higher than other lenders’ maximum requirements. The minimum down payment for FHA is 3.5%, so the maximum LTV ratio is 96.5%. If you can finance the up-front mortgage insurance premium required by the lender, the LTV can go higher than 96.5%.
Say the insurance premium is 1.75% of the amount financed. From our example above, 1.75% of $90,000 is $1,575. If you decide to finance the premium, your LTV becomes 98.25%. And this is OK with FHA. It works similarly with VA mortgages, even with 0% down payment loans.
Your LTV may be favorable, but you still have to consider closing costs and asset reserves. Typically these can’t be financed and will have to be paid from your own assets, seller credits, and/or lender credits. Do discuss these additional costs and your LTV with your mortgage professional, who can help you do what’s right for you.